Where There’s Smoke There’s Fire

We have a little running joke at Indie.vc that we can tell the exact moment a category falls out of favor with VCs.

6–9 months before news broke that Nasty Gal was shuttering and Modcloth was selling for the price of their debt, we saw a huge influx of applications from eCommerce companies. It was clear to us that funding was drying up for these kinds of companies and VCs were moving on to the next set of promising categories.

Over the last 2yrs of running this experiment we’ve seen similar waves of dealflow when funding dried up for education startups, on-demand services, adtech solutions, media/content businesses and many many more.

Given the funding patterns of VCs, this is to be expected.

A new category (or a new take on an old category) emerges and dollars pour into the teams best suited to win the nascent market. This leads to fast followers and even faster funding cycles as new entrants jostle for pole position to become the winner that takes all.

Then reality sets in.

The largest VCs have made their bets early, so funding slows for fast followers. Timelines for user growth take longer than anticipated. Revenue comes harder and less profitably than planned. New competition continues to get funded, albeit from less well known funding sources. Then, the category starts to feel and look and actually be overfunded.

Enter the next shiny thing.

VCs, themselves, aren’t immune to these shifting sands.

This year we saw seed investing shrink, Series A rounds supersize and the return of the MEGA funds on a scale we’ve never seen before. It is the most dynamic funding environment I’ve seen in my nearly 20 year career as a VC.

Exciting?

For sure!

Confusing for founders who just want to get down to the work of building a real business?

Most certainly.

We welcome the shiny things and ensuing waves of applicants.

As the saying goes, where there’s smoke there’s fire.

VC are generally right about what the next big things will be. But, their timelines and binary world view leaves many opportunities wide open for companies with the conviction to follow a different playbook. Just because investor interest for a category dries up, doesn’t mean there isn’t plenty of opportunity left. But you’ll have to play by a different set of rules to capture it.

It is exactly these categories that often present some of the most compelling investment opportunities. The warning flags have already been raised. The costly roadblocks have already been removed. And those with subsidized business models become more and more susceptible to an independent competitor.

While VCs move on to the next NEXT big BIG thing, we’ll quietly stoke the embers of opportunities abandoned and overlooked. And support the founders with the fire to pursue them.

VC, Dad